Complete bankruptcy coverage

What happens next?

IN
COURT: Bankruptcy opponents want to file
appeals immediately to the 6th U.S. Circuit Court of Appeals
in Cincinnati, a move that could put the case on hold. They
believe Judge Steven Rhodes is wrong in saying pensions can
be cut, among other issues.

IN DETROIT: The judge
has told the city to come up with a plan to exit bankruptcy
by March 1. But Orr says he'd like to have one ready weeks
earlier. The plan could include anything from selling assets,
such as art, to cutting pensions and more. Detroit would need
the support of creditors and the judge to emerge from
bankruptcy.

HOW
LONG? Detroit is by far the largest city to go
bankrupt and the timeframe isn't known, especially because of
appeals. Orr would like to get it done by next fall when his
term ends as manager.

WILL
LIGHTS GO OUT? Orr says a ruling in favor of
bankruptcy will allow the city to keep paying bills incurred
since July 18. And it can keep police on the streets,
firefighters on duty and streetlights aglow.

The city of Detroit is insolvent, and bankruptcy was a foregone conclusion — and should have been filed years earlier.

That was the opinion of U.S. Bankruptcy Judge Steven Rhodes, who ruled from the bench this morning that the largest public bankruptcy case in U.S. history will continue.

Rhodes turned down objections from unions, pension funds and retirees, which, like other creditors, could lose under any plan to solve $18 billion in long-term liabilities.

The city has argued that it needs bankruptcy protection for the sake of beleaguered residents suffering from poor services such as slow to nonexistent police response, darkened streetlights and erratic garbage pickup.

"This once proud and prosperous city can't pay its debts. It's insolvent. It's eligible for bankruptcy," Rhodes said in announcing his decision. "At the same time, it also has an opportunity for a fresh start."

Detroit did not negotiate in good faith with its creditors in the run-up to filing for bankruptcy, but could not practically have done so and is eligible to proceed in court, Rhodes ruled.

"Was it a foregone conclusion, as (some of the objecting) parties assert? The answer is yes. It was for a long time," Rhodes told the court in his ruling, adding that debtors in bankruptcy court often wait longer to file than is in their own fiscal interests.

"Detroit is no exception...," he said. "But waiting too long does not suggest bad faith."

Rhodes also found that the city is expected to submit a bankruptcy plan that will likely impair pension benefits to retired city employees, and that federal law allows the city to do so. The pensioners who have relied on Article 9 section 24 of the Michigan Constitution to argue in court that those benefits are protected are using a "slim read" of the document and do not have rights that trump federal bankruptcy law, he said.

"No one should interpret this holding ... to mean that this court will necessarily confirm any (plan that) includes adjustments," he said.

Rhodes found that the city did not meet the burden of proving it had attempted in good faith to negotiate with creditors in the weeks preceding the July 18 bankruptcy petition, as Chapter 9 of the U.S. Bankruptcy Code requires. But that law also indicates that a city can proceed if "it is unable to negotiate with creditors because such a negotiation is impracticable," and Detroit's liquidity problems support that position.

Detroit filed for bankruptcy at 4:06 p.m. on July 18, after Gov. Rick Snyder had authorized Emergency Kevyn Orr to do so at 3:47 p.m. the same day. Orr has contended in court testimony before Rhodes in October that the city did attempt to negotiate in good faith, but there simply was no time.

The city had laid out a timetable for negotiations at a June creditor meeting, including a time to submit proposals from June 19-July 12 and an evaluation period July 15-19. But Orr also said he only received one counter-proposal from bond insurers Ambac Financial Corp. and the National Public Finance Guarantee Corp., who insure about $170 million and $100 million respectively of the more than $18 billion in debt the city claims.

Several other prospective creditors had also gone to court seeking to prevent a bankruptcy petition, and the city had skipped several payments on bond debt to avoid running out of cash completely before the petition was filed.

Appeals, plans

Amy Haimerl | Crain's Detroit Business

Three overflow rooms at the courthouse housed the media and other spectators this morning; outside the building, about 50 protestors marched and chanted their objections.

The American Federation of State, City, County and Municipal Employees (AFSCME) Michigan Council 25 union, AFL-CIO and other city-worker represented unions immediately filed an appeal to Judge Rhodes ruling in U.S. Bankruptcy Court.

Michael Artz, associate general counsel for AFSCME, said the union hopes the appellate court can uphold the "explicit protection" of the Michigan Constitution.

"We think this is a dark day for Detroit retirees and Detroit city workers," Artz said. "… retirees are one day closer to experiencing real pain because of this decision … and we're confident that the appellate courts will rule that the Michigan Constitution means something and will protect pensioners."

However, Rhodes said he will not stay the proceedings to allow for appeals.

Brian O'Keefe, partner at Birmingham-based Lippitt O'Keefe PLLC, representing the Detroit Retired City Employees Association and Retired Detroit Police and Fire Fighters Association in the city's bankruptcy case, said shortly after the ruling that the associations will "consider all of our alternatives. Stay tuned."

Rhodes essentially found that the city has standing to seek bankruptcy protection and that he expects the city to submit a plan in the next several weeks that will include some proposed benefit impairment to the city's 23,000-plus retirees. But he added that today's ruling is only a "preliminary" one, and he has not decided yet whether he will approve a pension cut — only that the city can propose one.

An attorney for the city told Rhodes on Tuesday he was "not sure" if the city would be able to submit a plan to restructure its debts before the end of the year, as previously expected.

In a statement issued shortly before he spoke to reporters today, Orr said the city would continue to move forward as quickly and efficiently as possible.

"Time is of the essence," Orr said. "We plan to submit a plan of adjustment in the coming weeks, file a disclosure statement early next year and work to exit Chapter 9 protection by the end of September. We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens."

Snyder called the ruling a "call to action."

"We are confronting fiscal realities that have been ignored for too long," Snyder said. "Today's decision will allow Detroit to regain its financial footing and spark investments in key areas that will improve the quality of life for all residents and encourage growth and investment."

Bing, Duggan, others react

Mayor-elect Mike Duggan issued a statement shortly after the ruling.

"This is a day in Detroit's history that none of us wanted to see. Now that Judge Rhodes has ruled the city eligible for bankruptcy, we are about to move into the plan-of-adjustment phase that is likely to define our city government for years to come," Duggan said.

"I'm going to do everything I can to advocate on behalf of Detroit's future in this process. We need to make sure the retirees are treated fairly on the pensions they earned, and we need to make certain we come out of bankruptcy in a way we can afford to provide the quality of city services the people of Detroit deserve."

Mayor Dave Bing called on the residents of Detroit to start "changing the conversation."

"We can't think that the bankruptcy is the worst thing that ever happened to us," Bing said. "It can help us — allow us to deal with things that should have been dealt with over the past 20 or 30 years. This opportunity today gives us a chance to move forward with a clean slate and make good decisions that will improve the quality of life for Detroit and its citizens."

Other state, regional and national leaders also reacted to the news:

Detroit Regional Chamber President and CEO Sandy K. Baruah: "I am not surprised, but relieved, of Judge Rhodes' decision today. This now clears the way not only for the bankruptcy proceeding, but also the critical process of reforming city government structures and processes. ... Bankruptcy is a tool to reform and restructure government service delivery in a cost-effective manner that works for the citizens and businesses of Detroit. I also appreciate the judge's apparent admonition to tread carefully regarding pension obligations. While bankruptcy always involves difficult and painful choices, it is important to remember that pension obligations impact real people in a very real way."

Oakland County Executive L. Brooks Patterson called Rhodes' ruling an "official imprimatur" and said: "Today's ruling marks the beginning of a long and arduous process. In the end, I feel genuine remorse for all the creditors who will be left holding the bag. Nobody said, however, the process is fair. Whatever impact it has on Oakland County, it will be negligible to what Detroit will endure in the months ahead."

Macomb County Executive Mark Hackel said the Detroit eligibility ruling is an "opportunity for local governments to take a good look at what you're doing, in terms of the promises you make" to municipal employees and creditors. The county had its AAA credit rating to AA+ by Standard & Poor's Ratings Services last month, and Hackel said he thinks the bankruptcy is partly responsible.

"Bondholders are going to be more leery of government entities," he said. "Our finances are in better shape than they've ever been, and they (Standar'd & Poor's) have admitted to that. And when we asked why the downgrade, we're told there are new criteria now. We're a pretty middle class community and apparently there's nothing we can do but raise our income levels (of residents). How do you do that?"

House Democratic Leader Tim Greimel, D-Auburn Hills: "The success of Michigan depends on the success of Detroit, and I look forward to supporting the city restructuring in a way that leads to sustainable prosperity. However, I disagree with the judge allowing innocent retirees to pay to protect Wall Street bond holders, and I hope he lives up to his promise to only approve a plan of adjustment that is fair and equitable."

Gubernatorial candidate Mark Schauer: "It's time to rebuild the great city of Detroit. How we got here isn't as important as how we build a better future for Detroit's families, businesses, and neighborhoods. As the bankruptcy restructuring plan advances, Gov. Snyder and Kevyn Orr have a responsibility to uphold Michigan's constitution by protecting hard-earned retiree pensions over Wall Street creditors. Moreover, I would strongly urge Gov. Snyder to empower Mayor-Elect Duggan to lead the city's day-to-day turnaround efforts. It's time for Detroiters to lead Detroit."

Jordan Marks, executive director of the National Public Pension Coalition: "In the bankruptcy, the modest pensions of Detroit's firefighters, police officers, and other city employees could be all but wiped out, even as Wall Street banks continue to extract hundreds millions of dollars from the city's economy. This is a dark day for people of Detroit who worked hard, played by the rules, and are now at risk of losing everything."

Lonnie Scott, Executive Director of Progress Michigan: "As the bankruptcy restructuring plan progresses, it's vital to prioritize the well-being and future of retiree pensions instead of protecting the profits of corporate creditors. I hope Judge Rhodes lives up to his promise to only approve a plan of adjustment that's fair and equitable. "